By Carson Lorts, CPA, Senior Manager at Blue & Co.
This past year, President Trump signed into law the One Big Beautiful Bill (“OBBB”), enacting many of his campaign promises. The OBBB brought on many legislative updates, including extensions or updates to numerous Tax Cuts & Jobs Act (“TCJA”) policies. Within these legislative changes, there are multiple items that have a direct impact on the real estate industry. Below is a summary of tax-specific real estate items to consider this tax filing season.
Bonus Depreciation
OBBB permanently reinstates 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Developers with projects beginning prior to January 20, 2025 will want to discuss with their tax advisor as costs incurred before January 20, 2025 generally will be subject to the 40 percent bonus depreciation rate instead.
Business Interest Limitations
Under the TCJA, business interest was initially limited to 30 percent of taxable income before interest, depreciation, and amortization. Later, interest became limited to 30 percent of taxable income before interest. OBBB will bring back depreciation and amortization into the calculation and revert the limitation to the initial TCJA policy. Additionally, capitalized interest is now subject to this limitation calculation.
Eligible small businesses continue to be exempt from the business interest limitation.
Taxable REIT Subsidiaries
Real estate investment trusts (“REIT”) will be allowed to hold up to 25 percent of their total assets in taxable REIT subsidiaries. This is an increase from 20 percent.
Qualified Production Property
In the manufacturing sector, nonresidential real property may be eligible for 100 percent bonus depreciation if it is used as an integral part of a qualified production activity. In some cases, acquired property may not qualify.
Real Estate Tax Credits
OBBB increases Low-Income Housing Tax Credits for projects after December 31, 2025.
The New Markets Tax Credit is made permanent.
Early Termination of Clean Energy Incentives
Included in the legislation are cuts to clean energy incentives. For real estate investors, the most prevalent cuts will be to the energy-efficient commercial buildings deduction and the new energy-efficient home credit. Many clean energy incentives are terminated after 2025.
Qualified Opportunity Zones
TCJA introduced significant tax benefits for investments in Qualified Opportunity Zones (“QOZ”) as an incentive for investment to spur economic growth in low-income communities. This benefit allowed investors to defer, reduce, or eliminate capital gains taxes by investing in QOZ funds before January 1, 2027. OBBB permanently extends and enhances the QOZ tax benefit and provides for reevaluation of designated zones every 10 years.
Capital gains invested in QOZ funds may be deferred for up to five years. QOZ investments held after five years receive a tax basis step-up of 10 percent. The basis of QOZ investments held for at least 10 years may be increased to their fair market value on the earlier of the date sold or 30 years from the date of investment.
The legislation also establishes a new QOZ investment opportunity, qualified rural opportunity funds, which are eligible for a 30 percent basis step-up after five years.
What This Means for Your Real Estate Strategy
Many of the provisions included in the One Big Beautiful Bill represent favorable developments for real estate developers and investors, creating new planning opportunities and potential tax savings. Taking a proactive approach now can help you maximize the benefits of enhanced depreciation, expanded credits, and extended investment incentives. To better understand how these changes may impact your projects or portfolio, connect with a Blue & Co. advisor to discuss strategic tax planning and preparation.
